Franchise agreements in black and white – with respect for the grey areas
This sponsored content was provided by Deloitte.
In an earlier entry we explored the way a franchisor’s choice of business partners can influence the nature of the business going forward. Segmenting and selecting franchisees is a way to steer a relationship toward certain characteristics. To be certain those decisions will work as intended, a franchisor needs to be able to back them up effectively on paper.
In structuring a franchise agreement, however, backing up an understanding shouldn’t always mean locking in rigid terms. On some things, you won’t want to budge. In other areas, you’ll want to maintain flexibility. Otherwise, events might overtake you.
After all, agreements last a while—often as long as 10 years—and a lot can change. You may also have multiple agreements in play at once, all of them rotating through different termination schedules. You’ll want the ability to make adjustments.
The first step is to be aware of risks in the business environment. What can change over the course of a franchise agreement? A lot. Technology moves fast. Regulations and legal standards change – as franchisors subject to recent “joint employer” rulings can attest. And the competitive environment that shaped your agreement on Day One can look very different a few years later, even in industries or business models that appear stable. Take burgers, for example. Franchises have been selling them for generations. But who knew a few years ago how quickly boutique and gourmet burgers were going to rise as a threat to more familiar paper-hat operations?
Identified risks should be explicitly assigned to the appropriate owners in the franchisor/franchisee relationship. Regulatory compliance matters such as employment responsibilities and operations licenses are common examples. In other areas, to borrow a phrase from politics, the parties must work to address “unknown unknowns.” It’s in the franchisor’s interest to make sure those future liabilities don’t all wind up at headquarters.
This is also a time to try to take risk out of the work you’re embarking on together. While the means may vary by business type, a franchise agreement that de-risks future operations wherever possible is one that is likely to remain mutually rewarding over the long term.
There can be a lot to process. Consider the way our Deloitte teams typically approach the challenge: Initiating franchise relationships is only one of five lifecycle stages we focus on, and in that first phase alone, we typically break out more than a dozen areas of concern, from site selection and construction to finance and marketing. One of those areas is subjecting franchise agreements to risk analysis – and that analysis takes into account 23 distinct components, from fees to advertising to equipment.
Finally, a franchisor and franchisee should set up explicit mechanisms for amendments, renegotiation, or early termination when they draft their agreements. If a deal is too rigid, the ways to change or break it down the road can involve disruption as well as costs and lawyers.
You and your franchisees didn’t get to this point without a measure of mutual appreciation. You intend to do business together for a long time – some longer than others, of course. The franchise agreement you craft together now can be a primary driver for how smooth the relationship is over time.
Be sure to read Kevin's other post regarding franchisee selection here.